۱- Introduction

۲- Literature review

۳- Data, variables, and model specification

۴- Empirical results

۵- Conclusion

References

Abstract

Using unique matched data on SME-bank relationships from 19 European countries, we examine the effects of bank-level market power on SME finance. We show novel evidence that bank market power at disaggregate level reduces SMEs’ access to bank finance and worsens their credit constraints. Whilst, banking market concentration improves credit supply to SMEs. The unfavourable market power effect is stronger for SMEs who are more informationally opaque, riskier and more dependent on external finance. We also show supporting evidence on Information-based Hypothesis where with greater market power, banks are more likely to engage in relationship lending.

Introduction

Unlike many other industries, financial institutions play various roles and multiple functions in an economy. For example, banks are the implementers of a sovereign’s monetary policies, for-profit organisations, and also the intermediations which provide credit and liquidity, risk reduction and maturity transformation processes to the markets. Of these unique roles, studies have garnered increasing interest in the banking effects on microeconomic agents. The debate on the effects of bank competition or bank market power on the credit supply to small and medium-sized enterprises (SMEs) is far from settled. Conventional competition models suggest that market power has an unfavourable effect on customers in many ways but due to the special role of information, market power of banks may have dubious effects than other industries on their customers. European SMEs are ideal for the study because of their scales in the European Economic Area (EEA) countries and bank finance is still the dominant source of financing amongst others (Siedschlag et al., 2014). Also, prior studies have shown that SME’s access to finance is a crucial determinant of its ability to survive and develop, and it aggregately affects a country’s economic stability and growth. For example, SME’s financing fulfilment is a crucial determinant of launching new products and improving knowledge transfer (Ayyagari et al., 2011) and SME’s access to finance is a key to achieve higher employment growth (Campello and Larrain, 2014).